With the weight of my portfolio being fairly little in technology or technological infrastructure, outside of Intel (INTC), I ended up purchasing a legacy tech stock in International Business Machines Corp. (IBM) back in October. Given that it has remain unchanged and that I have little presence in this arena – in regards to information technology services, as that is a different ball game, I chose to do a detailed IBM stock analysis this week! We shall see if it comes through our metrics we like to see and could be up for a potential purchase.
The Competition & Intro to the IBM Stock Analysis
To lay the ground work – IBM is in the information technology services, not necessarily the IT hardware like Intel provides or the software that Microsoft provides. They are more geared towards being the consultants and an overall business solutions service to the largest companies in the world. Given this playground arena, I would say the major competitor that I would be aware of in terms of offering an overall package would be… Accenture (ACN). Back in 2005, IBM sold their PC line/division to Lenovo (enter… our wonderful ThinkPads that we all know and love in our workplace!) – thus – their focus has mainly been through super computers, infrastructure, cloud computing and – overall business solutions on the IT side to major clients. Also – they have a strangle on over 170+ patents and are the leader in quite a few extensive categories – where they have the best defense (Patents) as their offense. Let’s dive into the two companies using our dividend stock screener metrics, as well as others, for the IBM stock analysis.
- To begin, IBM has paid and increased their annual dividends for 19 years + and is 6 years away from being a dividend aristocrat. As a dividend investor, that we are here at this blog, this definitely puts a grin on my face – love the long past history. Ask Bert about the importance about the longevity of dividend paying with his ARCP article. With ACN, though international (ADR stock), has paid and increased dividends for 8 years + on a semi-annual basis. Therefore, both stocks here get a check from Lanny over this area. Battle: IBM – 1 vs ACN 1. Next area.
- Dividend yield – as part of the IBM stock analysis we will dive into the yield of both companies. IBM is currently yielding as of November 7th’s close at 2.71% with a $4.40/yearly dividend paid quarterly at a stock price of $162.07. ACN is currently yielding 2.33% with a $1.95/yearly dividend paid semi-annually at a stock price of $83.48. As far as dividend yield goes – IBM is currently yielding higher and also is crushing over their historical 5 year yield of 1.90%, while ACN is yielding slightly above its 5 year yield of 2.10%. I am giving this point/score to IBM for a higher yield and higher than the historical yield by a bigger margin than ACN. Score: IBM – 2, ACN – 1
- Dividend Growth – IBM has grown their dividend at a clip over 14% for 5 years on average. Aka – WOW. Given they are typically a low yielder – this growth rate is incredible and is huge for investors. ACN 5 year growth rate is a whopping 21% on average. Words cannot even describe this one. This is a tough call. I am going to give IBM a half point and ACN a full point on this dividend metric here, as 14% is nothing to scoff at. Score: IBM – 2.5, ACN – 2
- Price to Earnings – Using an estimated FY 14 for IBM of EPS at $16.14, this places the P/E Ratio at roughly 10.04. Incredible undervalued given their earnings and fulfills the under 18 and under the S&P on average. Further, the industry is roughly 19, therefore, it’s better than most in the landscape the play in. Using ACN’s 8/31/14 FY EPS of $4.54, ACN trades at roughly 18.38x earnings. Ouch. Not undervalued here and is, I would say, appropriately valued as of this date. I am going to give a point to IBM on this and 0 to ACN. This makes the score: IBM – 3.5, ACN – 2
- Payout Ratio – Given IBM’s recently “rough” quarter, hence the large price decline, as pictured below (3 year chart of the price), I am going to use an estimated $16.14 for earnings per share for the year. This gives IBM a payout ratio of 27% aka – definitely checks the mark for the under 60% that we describe in our stock screener. Further, we will give ACN’s August year end’s EPS of $4.54, to push the payout ratio at 43%. Very good as well here. I will give a point for both being under 60%. Further – EPS will continue to grow for both firms, IBM will primarily be due to dissolving out of non-performing lines and share repurchase program, and ACN will be having strong EPS growth going forward as well, as technology is changing faster than ever and business are more complex than they have ever been given the acquisition/merger landscape we are in. Score: IBM – 4.5, ACN – 3.
Conclusion on the IBM Stock Analysis
Well, well… looks like the legacy corporation of IBM is the overall winner at 4.5 vs Accenture’s 3. Reasons why I do think it is better: Yield, Payout Ratio, History and Valuation. What is interesting though, as I was discussing with Bert this weekend, is that IBM has transcended into changing EPS and Payout ratio via large share repurchases. Here’s a small analysis – actual shares outstanding was $1,117.4M at 12/31/2012. One year later, that was reduced to $1,054.4M or a 5.64% decline at 12/31/13. This has dropped even further ever quarter – at Q1 2014 it dropped 4% more to $1,012.2, then at Q2 another 1.44% to $997.6M shares outstanding and then down to $989.7 or a 0.79% decline at Q3 2014. YTD for 2014, number of shares outstanding has dropped 6.13%! This then has a huge impact on your earnings per share – as less # of shares to spread net income – increases your EPS. With a higher earnings per share and the dividend remaining constant – this shows/computes out a lower payout ratio. This is part of the reason why IBM is able to increase their dividend at such a high clip. show strong earnings and a low payout ratio. What’s funny is, as Dividend Mantra put it, I don’t really care! If anything – this is just another way to reward shareholders – increasing value through share repurchases and dividend increases at an accelerated rate. I do not mind this at all, especially when you pair this with management dropping a business line last quarter that was not performing well for them to focus more on their services and cloud computing. I am excited and looking forward for IBM and what else is planned down the pipeline, as their repurchase program is continuing. Therefore, to conclude, in this IBM stock analysis I will say IBM is the winner and that I am looking forward to hopefully adding more to my position as soon as I have the capital to do so. I’m surprised I didn’t have it on our October watch list actually.
Thoughts with this analysis? Any flaws? Discussion? Do you think Accenture should be the winner? Any other competitors or targets that I missed? Also – as a dividend investor – is there something else you would like to see? Please let me know, always curious to have a nice discussion going! Thanks again for stopping by and talk soon.